Accounting Police: Do They Exist?

by: John Day

Who created accounting principles? Who sets and revises accounting standards? What if you don't follow all the rules, do you go to jail? Is there an accounting police force that investigates and arrests violators? It would seem that there must be some regulatory force to make sure that providers of financial statements conform to the rules. There is, up to a point, and here is how it works:

Mainly, it's all voluntary and it works pretty well. First, double-entry accounting originated in Italy in the 1400's, so its been around awhile. Accounting principles have evolved over the years just as have accounting standards. The reason why the system works is that the business community could not function if there was not commonality and consistency in financial statement reporting. It would be chaos, much like if there were no driving rules of the road.

Therefore, in the United States, a body of experts known as the Financial Accounting Standards Board (FASB pronounced Fasbee) was established in 1973, which superseded another board called the Accounting Principles Board (APB). The FASB members go through a lengthy process of analyzing and reviewing problems in the accounting field that are brought to them. After much thought, they will make a pronouncement as to what they think the new or revised way of approaching the treatment of an accounting issue should be.

They are a non-governmental organization that has private financing. A big supporter of FASB is the American Institute of Certified Public Accountants (AICPA). Many Certified Public Accountants (CPAs) belong to this prestigious organization and are obligated to abide by its guidelines and principles of behavior. Other countries no doubt have similar organizations that require high levels of accounting professional conduct.

FASB established an accounting code called "Generally Accepted Accounting Principles" or (GAAP). The assumption is that if a business financial statement is prepared according to GAAP, then the user of that financial statement could rely on or trust the information more readily than if not prepared according to GAAP. Those businesses that deviate from GAAP, and many smaller businesses do, cannot say that their statements are prepared under GAAP; in fact, they should inform the reader that they are not. However, let the buyer beware.

One governmental body that has a policing function is the Securities Exchange Commission (SEC). It is primarily concerned with public companies because their job is to protect investors from unscrupulous acts. Recently, the SEC has gotten into the act of establishing accounting standards. It has its hands full today.

Since most businesses use their financial statements to prepare their required income tax returns, the Internal Revenue Service (IRS) may audit those tax returns and review the financial statements upon which the tax returns are based. Not following the rules can get you in trouble with this governmental body.

You can see that in many ways compliance to the principles and standards is a mixture of voluntary and regulatory behavior. Currently, there is an effort underway to set international accounting standards due to the inexorable globalization process. This is a massive undertaking that will take years, but it is obviously necessary and inevitable.

Accounting NEWS:

Yahoo! News Search Results for accounting

Accounting change not meant to shock: SEC's Cox (Reuters via Yahoo! News)
An accounting change that could force banks to bring trillions of dollars of off-balance sheet transactions back on their books will be implemented in a way that will not create unnecessary shocks, the chairman of the U.S. Securities and Exchange Commission said on Thursday.

Leading CPAs Visit Capitol Hill to Promote Key Legislative Issues Facing the Accounting Profession (Business Wire via Yahoo! Finance)
WASHINGTON----Executive CPA leaders of 81 of the top 100 accounting firms in the United States that collectively employee more than 54,000 employees are visiting Capitol Hill today to talk to members of Congress about key legislative issues of importance to the accounting profession.

Advantage Systems Adds Dashboard Feature to AMB Accounting Software (Business Wire via Yahoo! Finance)
IRVINE, Calif.----Advantage Systems, a provider of accounting and contract management tools for the mortgage and real estate industries, announced the addition of a dashboard analytics feature to its Accounting for Mortgage Bankers software package.

$10 Million Verdict Upheld Against PricewaterhouseCoopers (Law.com via Yahoo! Finance)
Georgia's Court of Appeals has upheld a $10 million jury verdict against PricewaterhouseCoopers on behalf of four family trusts. In 2007, a jury found the Big Four accounting firm liable for negligent misrepresentation in a series of financial audits of a nursing home conglomerate.

3M Names David W. Meline Corporate Controller and Chief Accounting Officer (Business Wire via Yahoo! Finance)
ST. PAUL, Minn.----3M today announced that David W. Meline has been appointed vice president, corporate controller and chief accounting officer of 3M, effective September 1, 2008. Meline, 50, will lead 3M?s global corporate accounting, business finance, financial planning and analysis, and compliance efforts.

Vonya Global Launches Specialized Consulting Practice for Shipping Industry (PRWeb via Yahoo! News)
Vonya Global has created a suite of consulting services to assist shipping companies in meeting a variety of their compliance, accounting, tax, and IT needs. Specifically, these include: Sarbanes-Oxley compliance services, Internal Audit Outsourcing, M&A Due Diligence, and IT and Accounting Department Support Services.

Japan court upholds prison term for Internet mogul (AFP via Yahoo! News)
Flamboyant dotcom tycoon Takafumi Horie on Friday lost his appeal against a two-and-a-half year prison term for fraud in a scandal that rocked Japan's stock market.

Prison term upheld for 'graceless' Japanese Internet mogul (AFP via Yahoo! News)
Flamboyant dotcom tycoon Takafumi Horie Friday lost his appeal against a prison term for a fraud scandal that rocked Japan's stock market, with the judge accusing him of lacking social graces.

Mergis Group Survey Shows Slight Decline in Overall Confidence for Accounting and Finance Professionals (PR Newswire via Yahoo! Finance)
The Accounting and Finance Employee Confidence Index, a measure of overall confidence among U.S. accounting and finance workers, decreased 0.7 point to 49.8 in the second quarter of 2008, reaching a new low since the survey began in 2005, according to a recent survey commissioned by The Mergis Group® and conducted by Harris Interactive®.

Paulson's Fannie-Freddie Deal Scraps Bush's Free-Market Push (Bloomberg via Yahoo! News)
July 25 (Bloomberg) -- In October 2003, Treasury Secretary John Snow told Congress ``we need to be on guard'' against the ``perception'' that the U.S. government stood behind the stocks and bonds of Fannie Mae and Freddie Mac.